Spanish Risk Premium Soars on Fear of Portugal’s Infection

The 10-year risk premium offered by Spanish bonds has soared amid uncertainty about Portugal’s ability to avoid an economic rescue.

The 10-year risk premium offered by Spanish bonds recently exceeded 265 basis points, as opposed to its German counterparts. That compares with a euro-era record of 298 basis points on Nov. 30 and an average of 15 basis points in the first decade of monetary union, Bloomberg reported.

This rise was prompted by the uncertainty about Portugal’s ability to avoid an economic bailout from the European Union and the International Monetary Fund.and the upcoming auctions of national debt which will be undertaken by several countries in the eurozone, including Spain.

This uncertainty has made investors sell Spanish bonds, a decision which boosted the 10-year bond's yield to 5.57 percent.

Investors are concerned that when Spain and Portugal issue more debt this week, they will have to offer exceptionally high interest rates to attract lenders. Spanish and Portuguese debt has been pressured by bond markets because these countries have big public deficits and weak prospects for growth.When investors perceive that risk attached to a government's debt has increased, they mark down the price of that debt or sell it.

This week will be a key one for debt markets, not only for the Spanish Treasury, which will try to place five-year bonds Thursday, but also for the Portuguese Treasury, which on Wednesday will auction bonds.

Greece also will look for investors to back it up by buying six-month bonds, then Italy will close the week with an auction.

Germany and France are longing for Portugal to accept an international financial rescue as soon as possible to keep the debt crisis from spreading to other countries in the eurozone, such as Spain.